Janet Yellen again moves markets

The international financial markets had a very good week indeed. Granted, there were no results releases to set the mood, but enough happened to support the markets, both in macroeconomic terms and in the corporate arena.

The international financial markets had a very good week indeedBen Steinebach Head of Investment Strategy

Statements after the Federal Open Market Committee meeting proved particularly encouraging, with chair Janet Yellen observing that the inflation outlook was no cause for concern, despite the 2% uptick in core inflation in May (compared with 1.8% in April). She did express surprise over the speed at which unemployment rates have come down but warned that discouraged workers – who are no longer registered as unemployed – might return to the labour market if the economy continues to improve, slowing down the fall in unemployment.

We reckon the latter effect might well disappoint and unemployment falls continue to surprise on the upside, in which case the Federal Reserve might end up raising rates faster and more steeply than Yellen’s reassuring noises currently lead to believe. Meanwhile, the Fed has nudged up its fed funds rate expectations for the end of 2015 and end 2016, assuming that economic growth will continue to accelerate in both years. Projections for 2014, by contrast, have been revised down to take account of a poor first quarter resulting from severe winter weather. The remaining quarters will doubtless see growth pick up, albeit not sufficiently to boost the annual average. Confounding expectations by staging an increase, the Philadelphia Fed Index’s readings were testimony to this growth revival, but housing starts came down in May – against a steep upturn in April. The encouraging news flows boosted equity markets by around 1% up until Thursday, a little more in the United States than in Europe, and with Japan beating the lot by climbing 1.75%.

New bidders for Alstom – or parts of it

In addition to the largely positive macroeconomic news, a few corporate titbits impacted share prices. The courtship of France’s Alstom continues to be torrid, and Blackberry and Oracle both made headlines with their results releases, the former in a good way, the latter less so. In the past week, General Electric put an improved offer on the table for its French industry peer Alstom. No changes to the bid price, but GE did provide more reassurances about future employment and company strategy to address the concerns of France’s prime minister Hollande that employment at Alstom is at risk. Siemens and Mitsubishi have also upped their bids, but they only want to buy a few parts of the French company.Oracle released disappointing figures for the fourth quarter of the 2013/2014 financial year. Acquisitions have helped the company to ratchet up revenues, but earnings per share have been moving south. And revenues have staged less than 5% growth for 11 consecutive quarters in an industry marked by the growth of cloud computing, which is hitting traditional software players such as Oracle very hard. The company’s only recourse would seem to be to snap up more rivals, particularly at the cloud computing end of the business. BlackBerry saw its share price shoot up by nearly 10% after presenting better than expected results in the past few months. CEO John Chen sees better times ahead for the struggling smartphone company after a number of turbulent years, and expects to be able to start focusing on growth. US markets added 0.9% (Dow Jones) and 1.8% (Russell 2000 for small caps) in the past week, while the S&P 500 recorded a new all-time high at 1959 points. Amsterdam’s AEX index kept up with the international markets and steamed ahead to 418 points, nearly 1% up on last Friday.

High yield comes into its own

Janet Yellen’s reassurances pushed down yields across the world. Things are also looking good at the high yield end, with solid results and excellent prospects. At the start of the week, 10-year yields had edged up on robust economic growth expectations and rising inflation, but the Fed chair’s comments on excess capacity in the labour market sparked immediate falls, with the effect also making itself felt in many other fixed income segments. The market for higher yielding but more risky corporate bonds saw spreads vis-à-vis government bonds narrow, with demand for company funding increasing smartly as banks have become more reluctant to lend due to much stricter reserve requirements. Pushing up the total high yield debt, this has made for a more mature market. Credit quality has also improved recently, as default risks have declined on brighter macroeconomic prospects.

Purchasing managers expected to steal the show

We’re in for a bit of a bland time, with another week of – probably – little in the way of corporate news. A few macroeconomic indicators are slated for release, kicking off with purchasing managers’ sentiment for June. Released at the same time in a slew of countries, PMI readings suggest the way production is moving going forward. A good number of consumer confidence data are about to be released, which should give insight into future consumer spending patterns – the biggest component of GDP. These confidence figures (also covering June) will be released in the United States (both the Conference Board’s and the University of Michigan’s), in Germany, Italy and France. New data on business confidence will also be released in the week: in Germany (IFO), the Netherlands, Belgium and Italy. In addition, we can look forward to the odd release on various areas of interest, such as the US housing market, industrial production and retail sales in a number of countries.

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Ben Steinebach

Head of Investment Strategy

Ben Steinebach graduated with a degree in General Economics, specialising in macroeconomics, international economic affairs and public finance. He held various positions in the financial industry before joining MeesPierson in 1999. Ben has been Head of Investment Strategy at ABN AMRO since 2010.